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If your pension savings are worth more than £1 million you may need to protect your pension savings from the lifetime allowance tax charge.
The lifetime allowance is the amount of savings you can take from your pension schemes without facing a tax charge.
The lifetime allowance is currently £1 million (having reduced from £1.25 million on 6 April 2016).
From 6 April 2016 if you take more than £1 million from your combined pension savings, you may face a tax charge.
Fixed Protection 2016
Exactly the same concept as Fixed Protection 2012 and Fixed Protection 2014; anybody can apply and be granted Fixed Protection and in doing so their LTA will remain at £1.25 million. In order to retain this form of protection, no further contributions can be paid after 6 April 2016. You cannot apply if you already have Enhanced Protection, Primary Protection or Fixed Protection 2012 or 2014.
Individual Protection 2016
Exactly the same concept as Individual Protection 2014; this protection however gives a personalised LTA of the lower of the value of pension savings as at 5 April 2016 and £1.25 million. Pension contributions can continue but any funds over the personalised LTA will be subject to the Lifetime Allowance Charge. You cannot apply if you already have either Primary Protection or Individual Protection 2014.
The lifetime allowance tax charge is
The lifetime allowance applies to the value of your combined UK registered pension schemes and some overseas schemes. Your pension scheme administrator(s) may already send you information that will help you to find out the value of your combined pension savings. If not you should contact your pension scheme administrator(s) for more information.
This information will help you if you need to apply to protect your pension savings from the lifetime allowance tax charge.
If you are agreeing salary and pension contribution levels with your employer for next year, increases in contributions to your pension schemes based on higher earnings may mean you exceed the lifetime allowance.
You may need to act to protect yourself from a tax charge even if you are not yet nearing retirement.
If you have existing protection but know that you may lose this you may also need to consider whether to apply for the new protections.
You are now able to apply to HMRC for Fixed Protection 2016 and Individual Protection 2016 using their online self-service portal which you can access via the following link https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance.
Please note that the deadline for applying for Individual Protection 2014 has now passed. All applications for this protection had to be made to HMRC before 5th April 2017.
The lifetime allowance was introduced in 2006 and was reduced in 2012, 2014 and, most recently, in 2016.
Each time the lifetime allowance reduced, people who had already planned their pension savings on the basis of the higher lifetime allowance could protect their pension savings by applying to HMRC and should have received a certificate to confirm their protection.
However you may still be subject to the lifetime allowance charge if you lose this protection.
You can still apply for protection from the 2016 reduction in lifetime allowance and there is currently no application deadline for this. You can find more information about how to do this along with other information about the existing protections and when these may be lost at Tax on your private pension contributions.
Introduced in 2006, it was aimed at pension members already above the £1.5 million Lifetime Allowance (LTA). Primary Protection calculated the ratio that your funds exceeded the new LTA; this ratio would then be applied to any increase to the LTA in the future. Therefore your allowance would increase in line with the LTA and you could continue to contribute.
This ratio is based on the highest LTA since 2006 and does not reduce, therefore primary protection limits are still based on £1.8 million.
Also introduced in 2006, this protection was aimed at those likely to exceed the LTA by the time they retired. It completely removed the LTA and allowed funds to grow indefinitely. The main drawback was that you could no longer make contributions, which was restrictive and meant you would be unable to make up any losses suffered by the fund, either as a consequence of a crash in the market or a drop in value of an asset such as property.
Since 2006 the LTA increased each year, until 2011, when the limit hit its peak of £1.8 million. At this time the economic climate was bleak and the government needed to make cuts and increase tax.
This was the point of the first LTA reduction implemented by HMRC, which brought the LTA back to the original £1.5 million from April 2012.
Fixed Protection (FP12)
Introduced in April 2012, this protection was aimed at those who had over £1.5 million in pension savings, or were likely to by retirement age. It was a simple concept where anyone who applied would retain the LTA of £1.8 million. Similar to Enhanced Protection, the stipulation by HMRC was that no additional contributions could be made.
Fixed Protection 2014 (FP14)
Introduced in April 2014, this protection was aimed at those who had over £1.25 million in pension savings, or were likely to by retirement age. Anyone who applied would retain the LTA of £1.5 million. Similar to Enhanced Protection, the stipulation by HMRC was that no additional contributions could be made.
Individual Protection 2014 (IP14)
As with FP14, this protection was introduced in April 2014 but instead gives a personalised LTA equivalent to the pension savings at 6 April 2014 up to £1.5 million (instead of the previous £1.25 million). Pension contributions can continue but any funds over the personalised LTA will be subject to the Lifetime Allowance Charge.